IMF boosts Canada's outlook

The International Monetary Fund boosted Monday its 2011 GDP outlook for Canada, citing business investment and higher commodity prices as the key drivers for what’s expected to be one of the best economies among industrialized countries

OTTAWA — The International Monetary Fund boosted Monday its 2011 GDP outlook for Canada, citing business investment and higher commodity prices as the key drivers for what’s expected to be one of the best economies among industrialized countries.

And unlike the United States, the IMF said Canada’s policymakers have the country on the right fiscal track, with a “sound and credible” plan to return to budget balance by mid-decade.

Still, the Washington-based global organization, in its latest world economic outlook, warned risks to the Canadian economy are tilted to the downside, led by a strong currency, deterioration in real estate prices, and bloated household balance sheets. As a result, the Bank of Canada is well within its right to take a “wait-and-see” approach when it comes to increases in interest rates.

Overall, the IMF kept its forecast for global real GDP growth unchanged from January, expecting a 4.4% advance in 2011 and a 4.5% expansion next year.

“Given the improvement in financial markets, buoyant activity in many emerging and developing economies, and growing confidence in advanced economies, economic prospects for 2011–12 are good, notwithstanding new volatility caused by fears about disruptions to oil supply,” the IMF said.

The forecast for growth in emerging markets remained as is compared with January, with a 6.5% annual advance penciled in for 2011 and 2012.

The IMF, however, slightly pulled down its 2011 outlook for most advanced economies, to 2.4% growth from 2.5%, led by downward adjustments to Japan, Britain, the eurozone and the United States.

The one exception, though, was Canada. The Canadian economy is now expected to grow 2.8% in 2011, or at the same pace as the United States, and lead industrialized countries in terms of economic activity. The revision represents a half-percentage point jump from the January outlook.

Bay Street analysts expect the Bank of Canada to boost its forecast for the domestic economy in its quarterly economic outlook, to be released Wednesday, by a nearly similar amount. In its first-quarter outlook, the Canadian central bank anticipated a 2.4% advance in 2011 – a forecast economists say now looks stale given the strong data to date.

For 2012, Canada is expected to grow 2.6%, or slightly less than the IMF’s January outlook.

The IMF said 2011 growth of 2.8% would be powered by domestic demand “and private investment in particular, in line with strong commodity prices.” Economists at CIBC World Markets recently said business investment by Canadian companies was set to take off this year and next — led by heavy hitters in the manufacturing, energy and utilities sectors.

However, the IMF added the strong Canadian dollar was expected to be “a drag” on growth. Risks to the growth outlook are tilted to the downside, it said, with the main domestic risk being deterioration of housing markets and household balance sheets. Canadian household debt is at a record high level, although recent indicators suggest household borrowing has slowed.

In terms of monetary policy, the IMF said the Bank of Canada “rightly” remains in an accommodative mode given the size of the output gap – although Canadian economists believe it has shrunk faster than anticipated in recent months. “Given the downside risks to the growth outlook, muted inflation pressures, and the forthcoming withdrawal of [government] stimulus, a wait-and-see attitude seems appropriate regarding further increases in the policy rate,” which stands at 1%.

The Bank of Canada is expected to leave the rate as is Tuesday when it releases its latest policy decision.

On the fiscal front, the IMF applauded Canadian policymakers for developing “a sound and credible plan to return to budget surpluses” beginning as early as 2015. But last week the Conservative Party, seeking a third mandate, indicated budget balance could be achieved by 2014 through cuts to program spending of up to $4-billion a year – although it has not yet identified where those cuts would take place.